Consumer: Payday loan late fees are ‘exploitative’

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Just weeks before a new crackdown kicks in, a watchdog has accused payday loan firms of exploitative tactics.

Leeds city bosses have recently launched a three-year drive to rid the city of payday lenders, and research has shown that up to 60,000 people in the city have used or consulted payday lenders, with around 22,500 believed to have taken out the loans to pay their bills.

But these lenders continue to be in high demand both in our region and nationally, as hard-up families continue to struggle.

This week, the firms – which will be subject to new tougher legislation from April – have been accused of “exploiting” borrowers who default on loans with over-the-top fees that tip them into a debt spiral.

Consumer watchdog Which? looked at the default fees charged by 17 lenders and found that Wonga, one of Britain’s most high-profile payday firms, topped the table by charging customers £30. Ten out of 17 payday lenders looked at by Which? had default fees of £20 or more, while four charged £25 and above. was found to charge customers a £29 fee for failing to repay the loan on the due date, while other lenders, such as, charged £12.

Which? has written to lenders to challenge the level of their default fees, which the consumer group believes should be no higher than the admin costs arising from a borrower defaulting.

The consumer group says excessive default fees are unlawful under the Unfair Terms in Consumer Contracts Regulations 1999, which state that it is unfair for lenders to charge a disproportionately high fee if borrowers default on a loan.

Wonga said its one-off £30 fee for late repayments “reflects the additional costs we incur in collecting these loans” and this has been independently assessed by a business advisory service.

A statement from Wonga said: “We are completely transparent about our default fee. On the rare occasions where people can’t repay, we always encourage them to get in touch with us so we can do everything we can to agree an affordable repayment plan, including freezing interest and charges.”

Which? pointed to an Office of Fair Trading (OFT) decision in 2006 that penalty charges for credit cards should be no more than £12, unless there are exceptional factors. The group believes that payday lenders are using “excessive” penalty fees to reduce their headline rates and lead customers to under-estimate the true cost of a loan.

Richard Lloyd, executive director at Which? said: “We believe payday lenders are exploiting borrowers with excessive fees which can push them even further into debt.”

From April, new regulator the Financial Conduct Authority (FCA) will start to oversee payday firms. Which? wants to see the FCA introduce a cap on the level that firms can charge in default fees, as part of a cap on the total cost of credit planned for January 2015.

A spokesman for the FCA said: “We welcome Which?’s interest in this area and we are already considering default fees as part of our work on capping the total cost of credit.”

The FCA recently announced plans to crack down on the sector, include limiting the number of times payday lenders are allowed to roll over loans twice, forcing them to put “risk warnings” on their advertising and limiting the number of attempts lenders can make to claw back money if there is insufficient cash in a borrower’s bank account to two.

The Competition Commission will produce a report into the payday industry later this year.

Payday firms were referred to the Commission by the OFT, which last year found evidence of deep-rooted problems, including some firms appearing to base their business practices around people who cannot afford to pay their loans back on time, meaning the original cost of the loan balloons and they become trapped with that lender.

Which? said that high charges are one of the biggest factors that tip borrowers into a spiral of debt. Previous research has found that more than half of payday loan users had incurred charges for missed or bounced credit repayments over 12 months, compared with one in six credit users generally. One fifth said they had been hit with “unexpected charges”.

Breakdown of late fees

The overdue payment fees charged by payday lenders, according to Which?’s findings:, £30;, £29;, £25;, £25;, £20;, £20;, £20;, £20;, £20;, £20;, £15;, £15;, £15;, £12;, £12;, £12;, £12.

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